The government has issued a new direction regarding the flexible use of capital receipts for transformation costs. The direction, and updated guidance, clarifies that assets sold to entities which are part of a local authority’s group do not qualify as disposals resulting in capital receipts which are eligible to fund the revenue costs of projects that deliver ongoing savings or improved efficiency. As such, local authorities will be unable to benefit from the capital flexibilities regime if they sell assets to subsidiaries. 

Since 2016, the government has made provision for local authorities to use capital receipts to fund revenue costs to enable transformation projects that produce long-term savings or reduce the costs of service delivery. This is contrary to the usual position that capital receipts from the sale of assets are restricted to funding other capital expenditure or paying off debt. In order to take advantage of the capital flexibilities regime, authorities must comply with directions from the Secretary of State, and have regard to guidance on the flexible use of capital receipts

A central element of the regime is that the expenditure to be treated as capital expenditure must be designed to generate ongoing revenue savings in the delivery of public services and/or transform service delivery to reduce costs and/or do so in a way that reduces costs or demand for services in future years for any of the public sector delivery partners. In April 2022, a further direction clarified that qualifying expenditure did not include discretionary redundancy payments. The Secretary of State for Levelling Up, Housing & Communities wrote to local authorities on 1 August 2022 to notify them of a further update, such that capital receipts used in accordance with the direction must only be from disposals where the authority does not still retain some direct or indirect control of the assets. The updated guidance explains that capital receipts used under the direction must be from “genuine disposals”. 

The change appears to have been at least partly in response to the plans of Bournemouth, Poole and Christchurch Council to sell beach huts to a wholly owned company and use the proceeds to fund revenue costs under the direction (see this letter from Paul Scully MP to the Council published in the Bournemouth Echo). The Secretary of State’s letter of 1 August 2022 warns local authorities not to “expend valuable time and resource on exploring novel practices and ways to circumvent the rules set by government”.

Local auditors should be aware of the new direction and updated guidance when considering local authority disposals which are intended to support revenue costs in reliance on the capital flexibilities regime.